Interesting Facts About Investing: What You Need To Know
Introduction
Investing is often painted as an easy way to get rich and live a worry-free life. The ads and success stories make it sound like anyone can make big bucks with just a few smart moves. But the reality isn't quite so rosy. There are some uncomfortable truths about investing that everyone needs to know before diving in. In this video, we'll explore these truths, and you'll be a better investor once you understand them.
By facing these realities head-on, you'll get a clearer, more honest picture of what investing is really all about. Having a deeper understanding of the game will greatly increase your chances of success. Stay until the end because you're sure to know someone who needs to hear these.
You’re Going to Wish You Started Earlier
It seems like no matter what age you begin investing, you're always going to wish you started earlier. This is just a fact you're going to have to come to terms with. Unfortunately, for some, they don't realize this until many years of potential gains have been wasted.
The Importance of Time in Investing
Hopefully, at some point, you'll learn that the amount of time you're invested is critically important to your overall portfolio, and almost everyone will regret waiting to start. Those who are fortunate enough to start investing in their 20s will wish they had started earlier, even though they started young and will have no trouble building wealth. Others who didn't begin until their 40s or 50s will also be regretful as they didn't take advantage of that period of growth during their earlier years.
The Cost of Delayed Investing
Regaining the lost ground will be practically impossible, requiring them to contribute significantly more money to their investments than if they had just started young and let their capital do the heavy lifting. Assuming average stock market returns, your investments will double about every 8 years. Each year that goes by while you wait for the right time to invest makes an indescribable difference.
You’ll Never Have Enough to Invest
If you're like most people, you really don't feel like you have enough money to invest. It's not like you have thousands of dollars lying around that couldn't be put to use somewhere. Who can really afford to set aside money every month?
The Reality of Financial Constraints
The reality is that you're never going to feel like you have plenty of money to invest. That's just the way it is for most people. Investing isn't exactly the most exciting thing either. It's even more boring when you're just starting out and the gains are inconsequential.
The Need for Sacrifice
There will always be something more enjoyable to spend money on. Wouldn't it be more fun to take the family on a trip or enjoy a nice meal out? Of course, it would, but the people who make compromises and have the dedication to cut back on fun purchases are going to be the ones reaping the rewards of that behavior, while others are upset they don't have enough money to retire.
Even as your income increases, you're never going to have enough money to invest if you prioritize spending it on enjoyment. It's on you to say, "Even though I'd rather spend this money on something fun, I need to invest some of it." The sooner you make this a habit, the better off you'll be.
Market Uncertainty Never Goes Away
People often come up with various reasons to delay investing. You might hear, "Now is not a good time to invest," "I'll invest when the economy improves," "I'm not investing during an election year," or "I'll wait until interest rates come down." These are just a few of the common excuses people use to avoid taking the plunge.
The Constant Presence of Uncertainty
The truth is there will always be excuses or something to be uncertain about, year after year. If we look back over the past 5 years or so and took note of these instances, there would be too many to keep track of. These uncertainties might vary in degree, but they're always going to be there, and expecting otherwise is completely naive.
The Opportunity in Uncertainty
In reality, when things are uncertain, it can actually be a good time to invest. Unknowns create volatility, which means there's more potential for investors to both lose and make money, but it also keeps investors rational and in check instead of becoming overly optimistic. Instead of using potential uncertainties as an excuse to spend your money or stay on the sidelines, evaluate the risks, make educated choices, and keep in mind that there will always be something to worry about.
No Strategy Consistently Outperforms
Even though an investing strategy might perform exceptionally well during a given period, no strategy consistently outperforms the market over the long term.
The Cycle of Investment Trends
For example, real estate was where everyone was making big gains from 2020 to 2023. Everyone was jumping on the real estate train because that's where the easy money was. Then, as soon as the market levels off, everyone looks for the next trend to jump to. Other times, Bitcoin is where investors were getting rich. Then it's tech stocks. The point is nothing is going to outperform consistently.
The Importance of Diversification
This reality means it's essential to avoid shiny object syndrome, where you constantly chase after the latest hot investment trend. By the time you jump to the next trend, it's probably already run its course and is ready to fizzle out. Markets are cyclical, and what worked well in one market environment might fail in another.
Diversification and sticking to a well-thought-out investment plan are crucial because they help mitigate the risks associated with trying to time the market or jump from one strategy to another. By maintaining discipline and avoiding the temptation to switch strategies based on short-term performance, you increase your chances of achieving more stable and sustainable returns over time.
A Down Market Doesn’t Mean a Personal Financial Crisis
When your net worth plummets 20%, 30%, or even more because of declining prices in the financial markets, what does this mean for you? It can feel as though years of financial progress have been wiped away in the blink of an eye and you just can't make any headway. It might make you feel defeated and like you've made irresponsible decisions, but this isn't necessarily the case.
The Normalcy of Market Fluctuations
We know for a fact that markets rise and fall with periodic crashes, so these occurrences shouldn't come as a surprise, and they shouldn't leave you feeling like your personal finances are in ruin. On average, the stock market drops by at least 20% about every 5 years. If you still have an income and an emergency fund, this shouldn't be seen as a problem or a reason to freak out.
The Importance of Staying Calm
Still, countless people panic when a down market comes along, causing them to sell everything and lock in major losses. A down market is a reminder to remain cautious, but if you're prepared, it probably won't affect your situation other than on paper.
A Rising Market Doesn’t Mean You’re a Genius
Just because your investments perform well for a short period of time doesn't mean you've suddenly gotten rich and can start splurging. A rising tide lifts all boats, so it's easy to make money when things are in the green.
Avoiding Overconfidence
Rapid portfolio growth over a few months or a year shouldn't make you feel like a professional investor. How many people do you know that feel like they hit the jackpot because their house rose significantly in price since they bought it? They probably didn't hit the jackpot; it's just that the overall market rose. Yet they often attribute the rise in their home's price to a choice they made.
The Importance of Long-Term Perspective
Secondly, a short burst of growth doesn't mean you've struck it big and can now enjoy those earnings and rely on them going forward. If your investment doubles in value in a short period of time, this doesn't really mean much. What matters is how it's going to perform going forward over the long haul.
The market is full of ups and downs, and a brief period of high returns doesn't guarantee long-term success. There will be times when your investments are flat or even lose value, and these periods can offset the gains you've enjoyed. It's important to keep a level head and not let short-term performance dictate your financial choices.
Maintaining a long-term perspective, reinvesting your gains, and sticking to your investment plan are crucial to building sustainable wealth. Celebrating short-term success with impulsive spending can jeopardize your financial goals and undermine the benefits of compound growth over time.
Conclusion
Investing isn't always the easy road to wealth that ads and success stories make it out to be. There are many uncomfortable truths that every investor needs to understand. In this video, we explored these truths to help you become a better investor. By facing these realities, you'll gain a more honest perspective on investing and increase your chances of success.
